Park National Corp - 10-Q quarterly report FY

 

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13,982,398 Common shares, no par value per share, outstanding at April 27, 2006.

 

 

PARK NATIONAL CORPORATION

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(dollars in thousands, except per share data)

Continued

(dollars in thousands, except per share data)

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Continued

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For the Three Months Ended March 31, 2006 and 2005.

The consolidated financial statements included in this report have been prepared by Park National Corporation (the “Registrant”, “Corporation”, “Company”, or “Park”) without audit. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation of results of operations for the interim periods included herein have been made. The results of operations for the quarter ended March 31, 2006 are not necessarily indicative of the operating results to be anticipated for the fiscal year ending December 31, 2006.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and footnotes necessary for a fair presentation of the condensed balance sheets, condensed statements of income, condensed statements of changes in stockholders’ equity and condensed statements of cash flows in conformity with U.S. generally accepted accounting principles. These financial statements should be read in conjunction with the financial statements incorporated by reference in the Annual Report on Form 10-K of Park for the fiscal year ended December 31, 2005 from Park’s 2005 Annual Report to Shareholders.

Park’s significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2005 Annual Report to Shareholders. For interim reporting purposes, Park follows the same basic accounting policies and considers each interim period as an integral part of an annual period.

Effective January 1, 2006, Park adopted Financial Accounting Standards Board Statement No. 123R (revised 2004), “Share-Based Payment” (“SFAS 123R”) which amends SFAS 123, Accounting for Stock-Based Compensation, and supercedes Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. SFAS 123R permits public companies to adopt its requirements using one of two methods. The “modified prospective” method recognizes compensation for all stock options granted after the date of adoption and for all previously granted stock options that become vested after the date of adoption. The “modified retrospective” method includes the requirements of the “modified prospective” method described above, but also permits entities to restate prior period results based on the amounts previously recognized under SFAS 123 for purposes of pro-forma disclosures. Park has elected to adopt SFAS 123R using the “modified prospective” method and accordingly will not restate prior period results. See Note 6 for a more detailed description of Park’s adoption of SFAS 123R.

Park does not have any off-balance sheet derivative financial instruments such as interest-rate swap agreements.

On January 3, 2005, Park acquired all of the stock of First Clermont Bank (“First Clermont”) of Milford, Ohio for $52,500,000 in an all cash transaction accounted for as a purchase. Immediately following Park’s stock acquisition, First Clermont merged with Park’s subsidiary, The Park National Bank. First Clermont is being operated as a separate division of The Park National Bank. The goodwill recognized as a result of this acquisition was $28,369,000. The fair value of the acquired assets of First Clermont was $185,372,000 and the fair value of the liabilities assumed was $161,241,000 at January 3, 2005.

On February 11, 2005, Park’s subsidiary, Century National Bank, sold its Roseville, Ohio branch office. The Roseville branch office was acquired in connection with the acquisition of First Federal Bancorp, Inc. (“First Federal”) on December 31, 2004. The Federal Reserve Board required that the Roseville branch office be sold as a condition of their approval of the merger transactions involving Park and First Federal. The deposits sold with the Roseville branch office totaled $12,419,000 and the loans sold with the branch office totaled $5,273,000. Century National Bank received a premium of $1,184,000 from the sale of the deposits.

The following table shows the activity in goodwill and core deposit intangibles during the first three months of 2006.

Goodwill is evaluated on an annual basis for impairment. Goodwill was evaluated for impairment during the first quarter of 2006, and no impairment charge was necessary.

Core deposit intangibles are being amortized to expense using the straight-line method over periods ranging from six to twelve years. Core deposit intangibles amortization expense was $637,000 for both the first quarter of 2006 and the first quarter of 2005.

The allowance for loan losses is that amount believed adequate to absorb probable credit losses in the loan portfolio based on management’s evaluation of various factors including overall growth in the loan portfolio, an analysis of individual loans, prior and current loss experience, and current economic conditions. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors.

Commercial loans are individually risk graded. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral and other sources of cash flow. Homogenous loans, such as consumer installment loans, residential mortgage loans and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on historical loan loss experience, current economic conditions and loan delinquency.

The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2006 and 2005.

The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2006 and 2005.

The Corporation is a multi-bank holding company headquartered in Newark, Ohio. The operating segments for the Corporation are its financial institution subsidiaries. The Corporation’s financial institution subsidiaries are The Park National Bank (PNB), The Richland Trust Company (RTC), Century National Bank (CNB), The First-Knox National Bank of Mount Vernon (FKNB), United Bank, N.A. (UB), Second National Bank (SNB), The Security National Bank and Trust Co. (SEC), and The Citizens National Bank of Urbana (CIT).

The operating results of the Parent Company and Guardian Finance Company (GFC) in the All Other column are used to reconcile the segment totals to the consolidated income statements for the quarters ended March 31, 2006 and 2005. The reconciling amounts for consolidated total assets for both of the quarters ended March 31, 2006 and 2005 consist of the elimination of intersegment borrowings, and the assets of the Parent Company and GFC which are not eliminated.

Effective January 1, 2006, Park adopted SFAS 123R using the “modified prospective” method and accordingly will not restate prior period results. SFAS 123R requires that compensation expense be recognized for all stock options granted after the date of adoption and for all previously granted stock options that become vested after the date of adoption. Prior to January 1, 2006, Park accounted for its stock option plans under the recognition and measurement principles of APB 25 and related interpretations. Under APB 25, no stock-based employee compensation cost was reflected in net income as all options granted under the Park stock option plans had an exercise price equal to the market value of the underlying common stock on the grant date.

Park did not grant any stock options during the first three months of 2006 and 2005. Additionally, no stock options became vested during the first three months of 2006 and 2005. The adoption of SFAS 123R on January 1, 2006 had no impact on Park’s net income for the first quarter of 2006. Additionally, since Park did not grant any stock options during the first quarter of 2005, there is no pro forma stock-based employee compensation expense for the first quarter of 2005.

The following table summarizes stock option activity during the first quarter of 2006.

All of the stock options outstanding at March 31, 2006 are exercisable. The aggregate intrinsic value of these outstanding stock options at March 31, 2006 was $6,572,000.

The intrinsic value of the stock options exercised during the first quarter of 2006 was $400,000 and the intrinsic value of the stock options exercised during the first quarter of 2005 was $571,000. The weighted average contractual remaining term was 2.7 years for the stock options outstanding at March 31, 2006.

All of the common shares delivered upon exercise of incentive stock options granted under the Park National Corporation 2005 and 1995 Incentive Stock Option Plans are to be treasury shares. At March 31, 2006, incentive stock options (granted under both the 2005 Plan and 1995 Plan) covering 780,869 were outstanding. The remaining outstanding stock options at March 31, 2006 of 14,091 pertain to a stock option plan assumed by Park in the acquisition of Security Banc Corporation in 2001. At March 31, 2006, Park held 946,678 treasury shares that are allocated for the stock option plans (including the Security Plan). Management anticipates that very few, if any, additional shares of Park common stock will be repurchased within the next twelve months for the stock option plans.

The composition of the loan portfolio is as follows:

The amortized cost and fair values of investment securities are shown in the following table. Management evaluates investment securities on a quarterly basis for other-than-temporary impairment. No impairment charges have been deemed necessary in 2006 and 2005. The unrealized losses are primarily the result of changes in interest rates and will not prohibit Park from receiving its contractual principal and interest payments.

Other investment securities consist of stock investments in the Federal Home Loan Bank and the Federal Reserve Bank. The fair values of these investments are the same as their amortized costs.

Park has a noncontributory defined benefit pension plan covering substantially all of its employees. The plan provides benefits based on an employee’s years of service and compensation.

Park’s funding policy is to contribute annually an amount that can be deducted for federal income tax purposes using a different actuarial cost method and different assumptions from those used for financial reporting purposes. A pension plan contribution of $9,117,417 was paid during the first quarter of 2006 and a pension plan contribution of $9,688,096 was paid during the first quarter of 2005.

The following table shows the components of net periodic benefit expense.

The Financial Accountings Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments”, an amendment of SFAS No. 133 and 140. This Statement changes the accounting for various derivatives and securitized financial assets. This Statement will be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of 2007. Management does not expect the adoption of this standard to have a material impact on Park’s financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”, an amendment of SFAS No. 140,” which changes the accounting for all loan servicing rights which are recorded as the result of selling a loan where the seller undertakes an obligation to service the loan, usually in exchange for compensation. SFAS No. 156 amends current accounting guidance by permitting the servicing right to be recorded initially at fair value and also permits the subsequent reporting of these assets at fair value. SFAS No. 156 is effective beginning January 1, 2007. Management does not expect the adoption of this standard to have a material impact on Park’s financial statements.

Management’s discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, Park’s ability to execute its business plan, changes in general economic and financial market conditions, changes in the competitive environment, changes in banking regulations or other regulatory or legislative requirements affecting bank holding companies and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional detailed information concerning a number of important factors which could cause actual results to differ materially from the forward-looking statements contained in management’s discussion and analysis is available in Park’s filings with the Securities and Exchange Commission, under the Securities Exchange Act of 1934, including the disclosure under the heading “Item 1A. Risk Factors” of Part I of Park’s 2005 Form 10-K. Undue reliance should not be placed on the forward-looking statements, which speak only as of the date hereof. Park does not undertake any obligation to publicly update any forward-looking statement except to the extent required by law.

Note 1 of the Notes to Consolidated Financial Statements included in Park’s 2005 Annual Report lists significant accounting policies used in the development and presentation of its financial statements. The accounting and reporting policies of Park conform with U.S. generally accepted accounting principles and general practices within the financial services industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Park considers that the determination of the allowance for loan losses involves a higher degree of judgement and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb probable credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based on periodic evaluations of the loan portfolio and of current economic conditions. However, this evaluation is inherently subjective as it requires material estimates, including expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans, and estimated losses on consumer loans and residential mortgage loans based on historical loss experience and the current economic conditions. All of these factors may be susceptible to significant change. To the extent that actual results differ from management estimates, additional loan loss provisions may be required that would adversely impact earnings for future periods.

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgement than most other significant accounting policies. Statement of Financial Accounting Standard (“SFAS”) No. 142, “Accounting for Goodwill and Other Intangible Assets” establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At March 31, 2006, Park had core deposit intangibles of $6.9 million subject to amortization and $61.7 million of goodwill, which was not subject to periodic amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Park’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Park’s banking subsidiaries to provide quality, cost effective banking services in a competitive marketplace. The goodwill value of $61.7 million is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods. SFAS No. 142 requires an annual evaluation of goodwill for impairment. This evaluation was performed during the first quarter of 2006 and no impairment charge was necessary.

Comparison of Results of Operations
For the Three Months Ended
March 31, 2006 and 2005

Net income increased by $465,000 or 2.0% to $23.8 million for the three months ended March 31, 2006 compared to the same period in 2005. The annualized, net income to average asset ratio (ROA) was 1.78% for the first quarter of 2006 compared to 1.70% for the first quarter of 2005. The annualized, net income to average equity ratio (ROE) was 17.65% for the first three months of 2006 compared to 16.92% for the same period in 2005.

Diluted earnings per share increased by 5.0% to $1.69 for the first quarter of 2006 compared to $1.61 for the first quarter of 2005.

For the first quarter of 2006 compared to the first quarter of 2005, income before federal income taxes benefited from a decrease in the provision for loan losses of $1.1 million and an increase in other income of $1.3 million. However, net interest income decreased by $1 million, operating expenses increased by $608,000 and federal income tax expense increased by $264,000.

Park’s principal source of earnings is net interest income, the difference between total interest income and total interest expense. Net interest income decreased by $1.0 million or 1.9% to $53.4 million for the first quarter of 2006 compared to $54.4 million for the first quarter of 2005. The following table compares the average balance and tax equivalent yield/cost for interest earning assets and interest bearing liabilities for the first quarter of 2006 with the same quarter in 2005.

Average interest earning assets decreased by $133 million or 2.6% to $5,005 million for the three months ended March 31, 2006 compared to the same quarter in 2005. This decrease is primarily due to the decrease in average investment securities, including money market instruments, of $192 million or 10.2% in the first quarter of 2006 compared to the same period in 2005.

Average loans increased by $58 million or 1.8% to $3,312 million for the first quarter of 2006 compared to the first quarter of 2005. Total loans were $3,318 million at March 31, 2006 compared to $3,328 million at December 31, 2005, a decrease of $10 million. The demand for commercial and commercial real estate loans was fairly strong during the first quarter of 2006, but loan repayments were larger than expected.

Total loans (net of the First Clermont acquisition and branch sale) increased by $52 million for all of 2005. This growth included a decrease of $27 million in loans in the first quarter, an increase of $30 million in the second quarter, an increase of $18 million in the third quarter and an increase of $31 million during the fourth quarter. Total loans increased by $25 million in the month of April 2006. The demand for commercial and commercial real estate loans continues to be strong and the demand for consumer and residential loans has improved. Management expects that loans will increase during the final three quarters of 2006, similar to the growth in loans in 2005.

The average yield on the loan portfolio was 7.35% for the first quarter of 2006 compared to 6.53% for the first quarter of 2005. Management expects that the average yield on the loan portfolio will continue to gradually increase as adjustable rate loans reprice at higher interest rates.

Average investment securities, including money market instruments, were $1,693 million for the first quarter of 2006 compared to $1,885 million for the first quarter of 2005. The following table compares the average balance of total investment securities, including money market instruments, for the past five quarters. The table also includes the average federal funds rate and average five year U.S. Treasury rate for the past five quarters.

Management has reduced the amount of purchases of investment securities during the past three quarters which has caused the average balance of investment securities to decrease. The funds generated from this strategy have been used to reduce borrowings and fund the increase in loans. As indicated in the table, the spread between the average federal funds rate and the average rate of a five year U.S Treasury security has narrowed with the increase in short-term interest rates. Typically, the investments purchased by Park yield 50 to 75 basis points more than a five year U.S. Treasury security. Management expects that the average balance of investment securities will continue to decrease in 2006 until the yield curve steepens and additional investment securities are purchased.

The average yield on taxable investment securities was 4.95% for the first quarter of 2006 compared to 4.90% for the same period in 2005. The tax equivalent yield on tax exempt investment securities was 6.94% for the first quarter of 2006 compared to 7.05% for the same period in 2005. No tax exempt investment securities were purchased during the past year.

At March 31, 2006, the tax equivalent yield on the total investment portfolio was 4.95% and the average maturity was 4.6 years. U.S. Government Sponsored Entities’ asset-backed securities were approximately 88% of the total investment portfolio at the end of the first quarter of 2006. This segment of the investment portfolio consists of fifteen-year mortgage-backed securities and fifteen-year collateralized mortgage obligations.

The average maturity of the investment portfolio would lengthen if long-term interest rates would increase as the principal repayments from mortgage-backed securities and collateralized mortgage obligations would be reduced. Management estimates that the average maturity of the investment portfolio would lengthen to 4.9 years with a 100 basis point increase in long-term interest rates and to 5.0 years with a 200 basis point increase in long-term interest rates.

Average interest bearing liabilities decreased by $178 million or 4.1% to $4,127 million for the three months ended March 31, 2006 compared to the same quarter in 2005. The average cost of interest bearing liabilities increased to 2.67% for the first quarter of 2006 compared to 1.93% for the first quarter of 2005. By comparison, the average federal funds rate was 4.46% for the first quarter of 2006 compared to 2.47% for the same period in 2005.

Average interest bearing deposits decreased by $83 million or 2.6% to $3,127 million for the first quarter of 2006 compared to the first quarter of 2005. This decrease was primarily due to a decrease in the average balance of certificates of deposits of $45 million or 2.9% to $1,522 million. The average cost of interest bearing deposits increased to 2.25% for the first quarter of 2006 compared to 1.55% for the first quarter of 2005. Management has concentrated on controlling the cost of interest bearing deposits and as a result, Park has experienced a decrease in certain rate sensitive deposits.

Average total borrowings were $1,000 million for the first quarter of 2006 compared to $1,095 million for the first quarter of 2005. The average cost of total borrowings was 4.00% for the first quarter of 2006 compared to 3.04% for the first quarter of 2005.

Net interest income decreased by $1.0 million or 1.9% to $53.4 million in 2006 compared to $54.4 million in 2005. The net interest spread (the difference between the yield on interest earning assets and the cost of interest bearing liabilities) decreased by 14 basis points to 3.90% in 2006 compared to 4.04% in 2005. The tax equivalent net interest margin (defined as net interest income divided by average interest earning assets) increased by 2 basis points to 4.37%. The decrease in net interest income of $1.0 million for the first quarter of 2006 compared to the first quarter of 2005 was primarily due to the $133 million or 2.6% decrease in average interest earning assets.

In the Financial Review section of Park’s 2005 Annual Report (pages 28, 29 and 30), management projected the following for 2006 — year-end loan balances would increase by 3% to 5% (page 29 under “Investment of Funds-Loans”), average total deposits would increase by 1% to 2% (page 28 under “Source of Funds-Deposits”) and net interest income would increase by 2% to 3% in 2006 with a net interest margin between 4.35% to 4.40% (page 30 under “Earnings Results”).

Loans decreased by $10 million during the first quarter of 2006. Management expects that loans will increase during the remaining three quarters of 2006, but anticipates that the annual growth rate for the year may be a little less than 3%.

Average total deposits (noninterest bearing and interest bearing) were $3,781 million for the first quarter of 2006 compared to $3,801 million for the fourth quarter of 2005. Management still anticipates that average total deposits will increase by 1% to 2% in 2006.

The following table displays net interest income, average interest earning assets and the net interest margin for the past five quarters.

Management now anticipates that net interest income for 2006 will approximate net interest income for 2005 of $220.6 million. The projected results for the second quarter of 2006 indicate that net interest income will be about 2% less than the second quarter of 2005. The net interest margin for 2006 is expected to be approximately 4.40%. The above table indicates that average interest earning assets have decreased for each of the past three quarters. This decrease has resulted from a decrease in the average balance of investment securities. Management expects that the average balance of interest earning assets in 2006 will be below the comparable quarter in 2005 until the yield curve steepens and additional investment securities are purchased.

Park did not provide a provision for loan losses for the first quarter of 2006 compared to $1.1 million for the first quarter of 2005. Net loan charge-offs were a recovery of $1,000 for the first quarter of 2006 compared to net loan charge-offs of $937,000 for the first quarter of 2005. Gross loan charge-offs were $2.6 million for both the first quarters of 2006 and 2005. Recoveries of loan charge-offs were $2.6 million in 2006 compared to $1.7 million in 2005. Park received recoveries of $1.1 million on commercial real estate loans during the first quarter of 2006. See Note 3 of the Notes to Consolidated Financial Statements for a discussion of the factors considered by management in determining the provision for loan losses and for the detail on loan charge-offs and recoveries.

The reserve for loan losses as a percentage of outstanding loans was 2.10% at March 31, 2006 compared to 2.09% at December 31, 2005 and 2.16% at March 31, 2005. Nonperforming loans, defined as loans that are 90 days past due, renegotiated loans and nonaccrual loans were $27.9 million or ..84% of loans at March 31, 2006 compared to $30.0 million or .90% of loans at December 31, 2005 and $29.8 million or .92% of loans at March 31, 2005.

Park’s net loan charge-off ratio for the past five years has been .18% for 2005, .28% for 2004, .43% for 2003, .48% for 2002 and .37% for 2001. Management expects that the net loan charge-offs for the last three quarters of 2006 may approximate the net loan charge-offs for the last three quarters of 2005 of $5.0 million. Management currently expects that the provision for loan losses in 2006 will approximate the net loan charge-offs. However, this is dependent upon the risk factors discussed in Note 3 of the Notes to Consolidated Financial Statements.

Total other income increased by $1.3 million or 9.1% to $15.4 million for the three months ended March 31, 2006 compared to $14.1 million for the first quarter of 2005. The following table compares total other income for the past five quarters.

The increase in total other income for the first quarter of 2006 compared to the first quarter of 2005 of $1.3 million or 9.1% is primarily due to increases in fees from fiduciary activities (11.9%), service charges on deposit accounts (9.6%), nonyield loan fees (16.4%), check card fee income (16.7%) and the increase in the cash surrender value of life insurance (11.6%).

In the Financial Review section of Park’s 2005 Annual Report (page 31 and 32 under “Other Income”), management projected that total other income would be $61.5 million in 2006 compared to $59.6 million in 2005, an increase of 3.2%. Management now anticipates that total other income for 2006 will increase by approximately 5.0% compared to 2005.

There were no sales of securities during the first quarters of 2006 and 2005.

Total other expense increased by $608,000 or 1.8% to $35.0 million for the quarter ended March 31, 2006 compared to $34.4 million for the first quarter of 2005.

Salaries and employee benefits expense were $20.0 million for both the first quarter of 2006 and the first quarter of 2005. Full time equivalent employees were 1,835 at March 31, 2006 and 1,830 at March 31, 2005. Management changed the group medical insurance plan on January 1, 2006 requiring all participants to be in a co-pay program. The changes made to the medical plan have resulted in a decrease of expense of $220,000 during the first quarter of 2006 compared to the first quarter of 2005.

The sub category of “Other Expense” increased by $613,000 or 5.7% to $11.4 million for the first quarter of 2006 compared to $10.8 million for the first quarter of 2005. This increase was primarily due to increases in data processing expense, other professional fees and marketing expense.

In the Financial Review section of Park’s 2005 Annual Report (page 32 under “Other Expense”) management projected that other expense would be approximately $145 million in 2006 compared to $139.4 million in 2005, an increase of 4.0%. Management now anticipates that total other expense for 2006 will increase by approximately 3.0% compared to 2005. Park adopted SFAS 123R on January 1, 2006 using the “modified prospective” method (see Note 6). No stock options were granted during the first quarter of 2006 and accordingly no compensation expense was recognized. Management expects that no stock options will be granted until the second half of 2006 and that the compensation expense will not be greater than $1 million for 2006.

Federal income tax expense was $10.0 million for the first quarter of 2006 compared to $9.7 million for the first quarter of 2005. The ratio of federal income tax expense to income before taxes was approximately 29.6% in 2006 and 29.4% in 2005. The difference between the effective federal income tax rate and the statutory rate of 35% is primarily due to tax exempt interest income from state and municipal loans and investments and low income housing tax credits. Park and its subsidiary banks do not pay state income tax to the state of Ohio, but pay a franchise tax based on their year-end equity. The franchise tax expense is included in other expense. State tax expense was $693,000 for the first quarter of 2006 and $764,000 for the first quarter of 2005.

Comparison of Financial Condition
At March 31, 2006 and December 31, 2005

Total assets increased slightly by $8 million or .2% to $5,444 million at March 31, 2006 compared to $5,436 million at December 31, 2005.

Total investment securities were $1,683 million at March 31, 2006 compared to $1,663 million at December 31, 2005, an increase of $20 million. The yield curve for investments remains relatively flat and as a result management does not expect to increase the investment portfolio during the second quarter of 2006.

Loan balances decreased by $10 million or .3% to $3,318 million at March 31, 2006 compared to $3,328 million at December 31, 2005. Management expects that loans will increase during the second quarter of 2006 as the demand for commercial and commercial real estate loans continues to be fairly strong and the demand for consumer loans has improved.

Total liabilities increased by $22 million or .4% to $4,899 million at March 31, 2006 compared to $4,877 million at December 31, 2005.

Total borrowed money decreased by $40 million or 3.8% to $989 million at March 31, 2006 compared to $1,029 million at December 31, 2005.

Total stockholders’ equity decreased by $13 million or 2.4% to $545 million at March 31, 2006 compared to $558 million at December 31, 2005. The decrease in total stockholders’ equity was due to an increase of $15 million in the accumulated other comprehensive loss and due to a $9 million increase in treasury stock. Long-term interest rates increased during the first quarter of 2006 and as a result the unrealized net holding loss on available-for-sale securities, net of taxes, increased to $25 million from $10 million. The number of treasury shares increased by 84,391 shares during the first quarter of 2006 as management purchased 96,427 common shares at a cost of $10.2 million and 12,036 common shares were reissued for stock options with related proceeds of $932,000.

The increase or decrease in the investment securities portfolio and short-term borrowings and long-term debt is greatly dependent upon the growth in loans and deposits. The primary objective of management is to grow loan and deposit totals. To the extent that management is unable to grow loan totals at a desired growth rate, additional investment securities may be acquired. Likewise, both short-term borrowings and long-term debt are utilized to fund the growth in earning assets if the growth in deposits and cash flow from operations is not sufficient to do so.

Effective liquidity management ensures that the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, Federal Home Loan Bank borrowings, and the capability to securitize or package loans for sale. The Corporation’s loan to asset ratio was 60.9% at March 31, 2006 compared to 61.2% at December 31, 2005 and 57.2% at March 31, 2005. Cash and cash equivalents totaled $156 million at March 31, 2006 compared to $174 million at December 31, 2005 and $158 million at March 31, 2005. The present funding sources provide more than adequate liquidity for the Corporation to meet its cash flow needs.

Stockholders’ equity at March 31, 2006 was $545 million or 10.01% of total assets compared to $558 million or 10.27% of total assets at December 31, 2005 and $556 million or 9.80% of total assets at March 31, 2005.

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts, and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. The minimum leverage capital ratio (defined as stockholders’ equity less intangible assets divided by tangible assets) is 4% and the well capitalized ratio is greater than or equal to 5%. Park’s leverage ratio was 9.37% at March 31, 2006 and 9.27% at December 31, 2005. The minimum Tier I risk-based capital ratio (defined as leverage capital divided by risk-adjusted assets) is 4% and the well capitalized ratio is greater than or equal to 6%. Park’s Tier I risk-based capital ratio was 14.18% at March 31, 2006 and 14.17% at December 31, 2005. The minimum total risk-based capital ratio (defined as leverage capital plus supplemental capital divided by risk-adjusted assets) is 8% and the well capitalized ratio is greater than or equal to 10%. Park’s total risk-based capital ratio was 15.54% at March 31, 2006 and 15.43% at December 31, 2005.

The financial institution subsidiaries of Park each met the well capitalized capital ratio guidelines at March 31, 2006. The following table indicates the capital ratios for each subsidiary and Park at March 31, 2006:

In the ordinary course of operations, Park enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises. See Page 35 of Park’s 2005 Annual Report for disclosure concerning contractual obligations and commitments at December 31, 2005. There has not been a material change in Park’s contractual obligations or commitments since year-end 2005.

See Note 1 of the Notes to Consolidated Financial Statements for disclosure that Park does not have any off-balance sheet derivative financial instruments. Park is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. The loan commitments are generally for variable rates of interest. See page 55 of Park’s 2005 Annual Report for additional information on loan commitments. There has not been a material change in Park’s off-balance sheet arrangements since year-end 2005.

Management reviews interest rate sensitivity on a quarterly basis by modeling the financial statements under various interest rate scenarios. The primary reason for these efforts is to guard Park from adverse impacts of unforeseen changes in interest rates. Management continues to believe that further changes in interest rates will have a small impact on net income, consistent with the disclosure on pages 34 and 35 of Park’s 2005 Annual Report, which is incorporated by reference into Park’s 2005 Form 10-K.

With the participation of the Chairman of the Board and Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer) of Park, Park’s management has evaluated the effectiveness of Park’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, Park’s Chairman of the Board and Chief Executive Officer and Park’s Chief Financial Officer have concluded that:

There were no changes in Park’s internal control over financial reporting (as defined in Rule 13a – 15 (f) under the Exchange Act) that occurred during Park’s fiscal quarter ended March 31, 2006, that have materially affected, or are reasonably likely to materially affect, Park’s internal control over financial reporting.

PARK NATIONAL CORPORATION

Not applicable.